Proprietary trading is not a new concept. In fact, it’s been around for decades, though the structures of today’s proprietary trading firms are as varied as the selection of cereal at your local grocery store. Generally, proprietary trading firms, or prop shops, are focused on finding professional traders who can manage the firm’s assets. While the structure provided by a proprietary trading group is great for the professional trader who knows how the industry works, there are some hidden pitfalls for the semi-pro or greenie trader choosing a firm to work with. In this post from the Apiary Fund, I’d like to go over a few elements common to most prop shops, and show you how the Apiary Fund’s unique model compares.

Capital deposit
It usually takes some capital to get through the doors of most prop trading firms. Afterall, you’re going to be trading the firm’s money, so why shouldn’t they hold a little to cover any potential losses? Sure, they put it into an individual capital account that is kept separate from other traders’, protecting you from their losses. But, if the company finds itself in some financial trouble, your money isn’t safe. Who’s really taking the risk here?

Training and various fees
While most proprietary trading firms require some type of training and education, some shops are simply fronts for education programs and offer little if any opportunity for trading. The training they offer is usually less than stellar, as the information offered in such programs is often generic and easily obtained online. Brett Steenbarger, prolific author in the trading industry, writes in his own blog that “very high education fees may be a sign that this is actually the way that the ‘prop firm’ is making its money…There *is* no prop firm, only the illusion of one to lure newbie traders into educational programs.”

There’s nothing wrong with the idea of a firm charging for a good, quality training program. The problems come when the tuition for these programs comprise the bulk of a firm’s revenue. A prop shop should have some vested interest in its traders. It’s a matter of principle, really.

If you’re going to teach me something, you ought to stand behind what you’ve taught me. Without any risk to the firm, there’s no incentive to provide quality training. The last thing you want as a new trader is to shell out a bunch of cash in exchange for something you could have learned on your own—only to be left high and dry. As I said before, a legitimate firm should have a vested interest in you.

Where does the profit come from?
Education fees walk hand-in-hand with commission rates. A commission is a fee charged by the firm for facilitating the trade. When a firm charges a commission, they usually mandate a high amount of trades from their traders. They push their traders into the markets and demand they make trade after trade. They take their cut off of every transaction, winner or loser, and the trader is fired if he loses. This model shows a lack of vested interest by a firm in its traders, and reeks of a scam. If they see profit only when you see profit, there’s some obvious incentive for them to help you become a successful trader.

The profit-payout model is preferable to commissions. A prop shop shouldn’t make money just for facilitating your trades. If that’s their model, why would they care whether or not you’re a successful trader? And if they don’t care about your success, why would they bother creating a worthwhile training program?

A firm operating under a profit-payout model will make its money on trader profitability. It will teach you how to be successful in the markets and split your profits with you. By sharing profits, the firm is not only showing its faith in its traders, but also validating the education it provides. A shop that’s truly invested in its traders will not capitalize on a trader’s losses. A firm that’s invested in its traders will teach them how to attain success so both parties can reap the spoils together.

Nobody wants to see a firm take an enormous chunk from their paycheck, but traders also have to be wary of firms that offer surprisingly high payouts. This is also a sign that a prop shop doesn’t rely on trader profitability. Charging hefty tuition fees and then taking virtually no profit from successful trades, these firms are unwittingly showing the intrinsic value of the training they offer.

These are some of the most fundamental ways in which the Apiary model differs from that of traditional proprietary trading firms. Having provided a comprehensive education in sound risk management, Apiary is confident in its traders. So confident, in fact, that they are willing to put their own fund at risk to see you succeed.

These are called boxcars. They are signals of a reversal. The candles leading into the boxcars are relatively small, and the two large ones should have virtually no wicks. The moment following the close of the bearish candle is a great place to go in short. The inverse is true at the end of a downtrend.

These are doji candles. After you’ve seen a significant expansion in the market, you might run into one of these. These candles signal total market indecision. They represent a price that pushed in either one direction, the other direction, or both, then finished right back where it started.

Like the doji, the spinning top denotes general market indecision. It’s not hard to tell why it’s called the
spinning top; its narrow price range combined with short high and low resemble the child’s toy.

There are many of these patterns, and they all go by many names. Don’t get too caught up in the terminology—the important thing is that you understand what the symbols and patterns are signaling. Clue in to these patterns; they can tell you a lot!

As traders, we’re all looking at the same information. Some of us may have a few extra filters and guides turned on, but we all use the same sources, same graphs, same charts. If it makes sense to us, it’s probably making sense to other people. If we’re considering an action based on what we’re seeing, they are too. And that’s okay! But, if we’re not seeing what everyone else sees, that presents a problem. That’s why it’s important to have a strong understanding of money management and act in accordance with that understanding.

There are certain candlesticks that signal reversal and continuation. When we notice these in combination with the rest of the overall market’s price direction, we want to pay attention to that. They give us good indications of where the momentum is in the market.

Found at the bottom of a trend, a green candle like the one to the right should tell us that the price moved all the way to the bottom of the wick, but was forced to close much higher. This is a strong reversal signal at the end of a run.

This blue candle has made the same movement down and closed lower than its open. The green candle at the bottom of a downtrend shows us there’s more momentum—if it’s the blue, there’s less momentum—because it closed lower. Because the green closed at the high, we can see it has a higher upward momentum. The blue opened higher, pushed down to the same low, and didn’t carry the momentum upward and closed lower than the open. While both of these candlesticks signal reversal, the green is stronger than the blue.

The inverse of this is true.

At the end of the uptrend, these wicks both signal that the price reached the same high, but was rejected at that level. With the blue, we have the opening price push all the way to the top and close at the bottom. This is a stronger reversal pattern. The green closed higher, so it is a weaker reversal signal of an upward trend.

Pay attention to this when you trade! These candles aren’t enough to trade on all by themselves, but they work well in combination with other things (trend, momentum, etc.).

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Any new pursuit brings with it an entirely new vocabulary, and the world of trading is no different. Candlestick is a word you’re going to run into a lot, so we’d like to give you a simple explanation of this important symbol. Now that you’re a trader, you’ll never see candlesticks the same way again!

What is the Candlestick?
Candlesticks are visual summaries of price movements. In the early 18th century, a Japanese rice merchant named Munehisa Homma began to keep track of the prices of rice sales in his local market. With these records he plotted charts to help him better understand the effect that price movement had on people’s decision to buy or sell rice. The charts in Homma’s records were the seeds that have since sprouted into modern candlestick charts.

Individual candlesticks represent smaller periods of time within the larger time frame of your chart. For example, if you choose to view a one-hour chart, that means each candlestick on your chart will represent one hour—if you choose a fifteen-minute chart, each candlestick will represent fifteen minutes. The chart you use will depend on the type of trading you do. If you prefer to do lots of smaller trades, you’ll want to use a shorter chart like the one-, five-, or fifteen-minute charts. If you like your trades to last all day, you may find a one- or four-hour chart more useful. It’s up to you!

Elements of the CandlestickFour pieces of information are contained in a single candlestick: the Open, the Close, the High, and the Low.

The Open is the price at the beginning of the period.
The Close is the price at the end of the period.
The High is the highest point the price reached within the period.
The Low is the lowest point the price reached within the period.

Now you might see why they’re called candlesticks; the high and low lines resemble a wick on a candle. The colors of a candlestick can also quickly relay information about overall price movement. Generally, a green candlestick shows an upward, or bullish, movement. A bullish movement is one in which the close is higher than the open. A red candlestick shows a downward, or bearish, movement—a movement in which the close is lower than the open. The green-red contrast is fairly standard, but you can set these to whichever colors work best for you.

The candlestick has been designed to make it easier for you to see what’s happening on your chart. Now that you understand these important symbols a bit better, you’re that much closer to forecasting price movements and potential market trends! In the next blog post, we’ll discuss reading candlestick charts, noticing trends, and translating that knowledge into successful trading.

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If you’ve ever watched baseball, then you’ve probably seen some spectacular double plays. But you’ll also notice there are times when the fielders don’t try to get both outs. This is a real-world example of risk management.

There are certain circumstances that make turning a double play too risky for the fielder, and they know they can’t afford to mess up! Two runners on base are exponentially more dangerous than one. So, what do they do? They throw straight to first base to get the sure out! Just as the fielders sometimes have to bite the bullet to ensure they get the out, we as traders have to get used to taking hits before we find good market positions.

While it would be nice to believe you’re going to generate profits on every trade, the reality is that you won’t. Sometimes you lose trades and runners advance, but if you remember the fundamentals of risk management, you’ll be a profitable trader. Small losses (a single runner) are much easier to overcome than large ones (two runners). Your efforts should be focused on minimizing the damage inflicted by the losing trades that will inevitably come.

Disclaimer

Investing in securities, currencies, and/or contracts associated therewith carries inherent risks. No person, institution, or entity, including the Apiary Investment Fund, can guarantee a return on investment for such transactions. Neither the Apiary Investment Fund nor its representatives will recommend the purchase, sale, or transaction advice for a specific security.